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Golf Stocks: Sand Traps And Smooth Greens

June 02, 1996

Personal Business: SMART MONEY

GOLF STOCKS: SAND TRAPS AND SMOOTH GREENS

If you're a golfer, sinking money into the sport probably comes more easily than sinking putts. But for a fraction of what you've already spent on clubs, greens fees, and lost balls, you can become a shareholder in companies poised to profit from the golf boom.

Of course, you're not likely to earn anywhere near the $40 million that golfer Greg Norman collected from a $2 million stake in Cobra Golf after it was acquired by American Brands in February. But you could be as lucky as Stapley and Chris Russell of New York, first-time equity owners who got in on the ground floor of a little-known club-shaft maker in 1993 and doubled their money in six months. The company, Aldila, was a major supplier to Callaway Golf, maker of the oversized Big Bertha clubs. Shortly after the Russells cashed out, Cal-laway cut back on orders from Aldila, and the stock plunged from $8 a share to $4.

Aldila exemplifies the speculative nature of golf stocks. Pure plays are limited because many big-name brands are part of diverse corporations. American Brands, for example, now owns Cobra, Titleist, and Foot-Joy, but derives just 10% of its revenues from those businesses. Of the 30 true golf stocks, most are small, cash-starved companies that went public in 1993 on the coattails of Callaway's successful initial public offering the year before. But only eight of those are good investment-grade stocks, says David Bradley of Bradley's Golf Insider (615 333-2000).

Although your chances of achieving Normanesque success are about as good as making a hole in one, promising opportunities exist. Buoyed by the introduction of Callaway's Great Big Bertha in 1995, "golf stocks have come on like gangbusters this year, fueled by the craze for titanium clubheads," says Bud Leedom, editor of Golf Insight & Investing (800 494-6539). Trumpeted by the company as stronger than steel, titanium is in such demand that golf insiders worry about shortages.

Coastcast, the leading manufacturer of titanium clubheads, is up nearly 125% year-to-date. As a major supplier to clubmakers such as Callaway and Taylor Made Golf, Coastcast surpassed first-quarter earnings and revenues projections and, at 12 times earnings, is fairly valued. Oregon Metallurgical (OREM), a titanium supplier to Coastcast, has also done well.

"CONFOUNDING." Despite its spectacular success, Callaway is still the least speculative equipment stock. Demand for oversized clubs continues, even as Callaway leads the titanium rally and has reserved most of its manufacturing capacity for its titanium woods, says Douglas Raborn, a Del Ray Beach (Fla.) money manager.

With more than $550 million in sales, annual compounded earnings growth of 40%, and no debt, Callaway is a golf blue chip. Since going public, the stock has split three times and appreciated by almost 1,000%. But Raborn still thinks it's a good value at around $32 a share "because of excellent management, a growing market in premium clubs, and the fact that golfers will continually turn to new equipment in the hopes of playing this confounding game better."

Small clothing makers such as Sport-Haley, which sells only to exclusive resorts and pro shops, are also attractive. The stock is up 40% since early April because of faster earnings growth, Leedom says. Plans to sell its apparel overseas make future growth likely. "The current p-e ratio of 26 is fairly reasonable," Leedom says.

Another way to play the golf market is through real estate. Family Golf Centers, which runs entertainment-oriented driving ranges in metropolitan areas, came out at $5 a share in 1994 and is now at $25. Even so, future growth appears likely since the company is aggressively making acquisitions, says Terry McAndrew, an investment adviser with Peacock, Hislop, Staley & Given in Phoenix. But while Leedom likes the concept, he believes the stock is overvalued at a p/e of 110. In December, 1995, money manager George Soros took a position, and ever since, the share price has been well ahead of earnings, he says.

GREENERY. A good dividend stock is National Golf Properties (TEE), the only golf real estate investment trust, says Golfweek's business editor, Adam Barr. The company acquires golf courses, leases them to a management company, and collects the fees. From 18 5/8 a year ago, the stock is hovering around 24. Since most golf revenues come from greens fees, Bradley expects other course developers to lead the next round of IPOs. Jack Nicklaus' Golden Bear International is a rumored candidate. The company says a public offering or private placement is a possibility, but not anytime soon.

Sure, golf stocks are a gamble. But for less than you'd wager on your golf game, you can own a stake. Then, if your game's not working, maybe your money will be.By Kerry CapellReturn to top